IHH’s sale of IMU hints at further mergers

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IHH Healthcare Bhd will see its balance sheet strengthened following its proposed RM1.35 billion sale of IMU Health Sdn Bhd.

Its indebtedness will fall to a very low level of 0.16 times from 0.21 times after the sale, with its net debt shrinking by more than 20% to RM4.58 billion.

In addition to repaying its debt, the group says it also plans to use the proceeds of the planned sale for capital expenditures, mergers and acquisitions or mergers and acquisitions, investments and working capital.

It would be used for these purposes within 12 months of the conclusion of the proposed sale, IHH says in its circular to Bursa Malaysia.

This would put IHH in a position for more inorganic growth as it seeks acquisition or merger targets, should such opportunities arise.

The sale of IMU Health is expected to be completed in the first quarter of 2023 and would see IHH receive investment gains of almost RM902 million, according to IHH.

This, the group notes, is calculated on the basis of an initial investment cost of RM308.67 million which the group had invested and committed in 2010 and 2011.

The proposed sale also includes the sale of a hospital under construction owned by IMU Health.

While the IMU is sold to Inbound Education Holdings Sdn Bhd (IEH), the hospital is sold to Columbia Asia Sdn Bhd (CASB).

Meanwhile, potential new owners of IMU Health are no strangers to the healthcare scene.

IEH is owned by Hong Leong Healthcare Group Sdn Bhd (45%), Rise Fund Inbound SF Pte Ltd (45%) and Employees Provident Fund (9.99%).

The Rise Fund is part of TPG Group, a US-based private equity firm, and the fund was founded in 2016 in partnership with Bono and Jeff Skoll, its website says. Hong Leong Group and TPG are also the owners of Columbia Asia Hospitals in South East Asia. They purchased these assets in September 2019.

Analysts say the sale of IMU is beneficial for IHH as it will allow it to monetize its non-core assets, allowing the proceeds to be invested in its core business areas.

“This is in line with its strategy to focus on strengthening its healthcare operations in existing markets.

“It is also in line with its plan to expand its footprint into new adjacent markets based on its cluster strategy approach of which it has good operational knowledge,” said Public Investment Bank Research (PublicInvest Research).

The proposed sale is priced at an enterprise value (EV) to earnings before interest, tax, depreciation and amortization (Ebitda) of 16.6 times.

“We believe the valuation is fair as it is comparable to the Paramount Education divestment in 2019, which closed at an EV/EBITDA ratio of 16x,” he adds.

PublicInvest Research maintained its “outperform” call on IHH with an unchanged target price of RM7.60 per share.

MIDF Research, meanwhile, points out that the sale of IMU should not lead to a significant decline in the financial performance of IHH.

IMU Health contributed approximately 1% of IHH’s total revenue and 3% of total net profit in its 2021 fiscal year ended December 31 (FY21).

“As a result, we are making no changes to our earnings guidance.

“We believe that the IHH is moving within our trajectory range,” says MIDF Research.

MIDF Research maintained its “buy” call on IHH with an unchanged target price of RM7.96, noting that the handsome gains from this divestment will benefit IHH in the long run.

It also notes IHH’s positive outlook and comprehensive expansion and growth plans as well as its strong balance sheet.

Kenanga Research, which is keeping its profit forecast for IHH for FY22-23 unchanged, has a coin sum target price of RM6.65.

“Based on our bottom-of-the-envelope calculations, if the divestment materializes, our price target should rise by 1.5%,” says Kenanga Research.

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